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In Washington, Medicare cuts are back on the table. Sunday afternoon, the Senate failed to find the 60 votes needed to pass Senate Majority Leader Harry Reid’s debt-cutting proposal, a bill which would have left Medicare and Medicaid untouched. The vote was 50 to 49. That it was so close illustrates just how divided this country is.

Now the president and Congressional leaders have signed off on a “compromise” that might best be described as “Conservatives 10; Liberals 0.

What is mind-boggling is that none of this had to happen. We were not facing a debt crisis. Conservatives manufactured a crisis, and then demanded Draconian spending cuts. For decades, the U.S., like other developed countries, has been lifting its debt ceiling on a regular basis. Normally, raising the deficit ceiling does not lead to a pitched partisan battle.

No question, we are sitting on a heap of debt. Going forward, we should rein in government outlays that are not adding to the wealth of the nation, and begin to reduce the deficit. But today we must invest in the country, and in the nation’s human capital. This is the worst possible time to slash government spending; the economy remains mired in a deep recession. The government should be investing tax dollars in ways that will create jobs. We need the stimulus that comes with government spending. Instead, as a result of this deal, “Unemployment will be higher than it would have been otherwise,” the chief executive of the bond investment firm Pimco, pointed out Sunday on ABC. “Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.”

The compromise sets out to slice more than $2 trillion from federal spending over the course of a decade. The cuts will come in two stages. When the legislation passes, today or tomorrow, this will trigger $917 billion in spending cuts over ten years while raising the debt limits by $900 billion. In the second stage, a new bi-partisan Congressional committee is charged with finding another $1.5 trillion this fall. Medicare, Medicaid and Social Security all will be on the table. The committee also can consider raising taxes, but it is expected that the six Republicans on the 12-person commission will block any tax increases.

The Committee is required to deliver its proposal to Congress by November 23; Congress is required to vote on the Committee's recommendations by December 23. If the two parties fail to reach an agreement, and the $1.5 trillion in savings does not materialize, the president would still receive a $1.2 trillion debt-ceiling extension. But that extension would trigger $1.2 trillion in automatic spending cuts across government — including defense and Medicare — to take effect starting in 2013. Defense would be hit hard. Surprisingly, Medicaid will be exempt from automatic cuts. To its credit, the White House decided to stand up for the poor.

The Associated Press fleshes out the details: “Social Security, Medicaid and veterans' benefits would be exempt from the automatic cuts, but payments to doctors, nursing homes and other Medicare providers could be trimmed, as could subsidies to insurance companies that offer an alternative to government-run Medicare.” Medicare benefits to seniors would not be cut.

While the White House protected Medicaid, no one protected the unemployed. Incredibly, under the terms of the deal, unemployment benefits will expire at the end of this year. Would Congress actually let that happen? The events of the past week have persuaded me that we are now living on another planet, so it’s hard to say. But I would wager that conservatives will fight to limit those benefits, all part of what economist Paul Krugman has described a conservative attempt “to set us on a glide path to a much harsher society.”

Last week former fed chairman Paul Volcker told Bloomberg: “All of this uncertainty [over raising the deficit] was unnecessary. This is part of a charade that goes on from time to time. It’s an old story.”

The debt debate does have “a particularly nasty tone to it this time,” Volcker acknowledged. Nevertheless, he told Bloomberg, when everything is resolved, all of the nation’s bills “will be paid,” though Social Security checks may be delayed. As Volcker knows, we must pay our lenders first–ahead of seniors, ahead of the military.

Volcker replied, in a slow, slightly hoarse voice: “Well, probably that is because I’ve lived through 8 or 10 debt ceiling things in the past.” Volcker possesses the gravitas that comes with age, intelligence, and experience. After the tomfoolery of the past week, I found it reassuring to hear a wise, if world-weary voice.

As Volcker knows, in Washington, raising the debt ceiling is close to a routine event. According to the, Treasury Department, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. Statistics on earlier debt limit raises show that George W. Bush raised the debt ceiling seven times for a total increase of 90 percent. Ronald Reagan raised the debt ceiling 18 times for a total increase of 199 percent, which is the highest ever percentage increase in U.S. history. So far President Obama has raised the debt ceiling three times for a total increase of 26 percent. ..

When it comes to lifting the debt ceiling there really is nothing for politicians to debate. Last week Bill Clinton explained “what many Americans may not understand.” Lifting the ceiling merely enables government to pay interest on the debt that we already owe, and continue borrowing to fund expenditures that have already been authorized. We have no choice.Raising the limits on U.S. debt does not mean that Congress is giving President Obama a “blank check” to increase future spending. The money already has been spent. This is why, normally, a vote on the debt ceiling would not capture the attention of the nation. But this time around, conservatives decided to turn what should be a relatively routine vote into high drama.

“We are just about the only major country in the world that [even lets] its legislative body to vote on raising its debt ceiling,” Clinton observed. Politicafact.com confirms that no other developed nation has a system that leads to the kind of political “brinksmanship” that we have just seen in Washington.

On The Money View, Perry G. Mehrling Professor of Economics at Barnard College, Columbia University agrees: “The solvency of the U.S. government is not in any serious doubt. The imminent S&P downgrade of Treasury debt is not about economics; it is about politics. It is, at root, about the public display of political dysfunction in Congress. Since there is no real solvency problem, the point seems to be to provoke a liquidity crisis, [so that we won’t have enough money on hand to pay next week’s bills, even though we still have good credit] and to use that crisis to force the other guy to back down.”

Much Ado about Nothing

This helps explain why House Majority Leader John Boehner worked so hard to bring his budget proposal to a vote in the House– even though he knew that it would never become law. The Senate would reject it, and if, by some fluke, it passed the Senate, the administration already had said that it would veto it.

Nevertheless, for days, Boehner was bloodied as he battled to bring his plan to a vote in the House. There, ultra-right members of his own party publicly defied him. Ultimately Boehner caved, and revised his bill, adding a balanced budget amendment that actually could make the deficit larger. (If government spending is cut and more Americans are unemployed, tax revenues will fall. The size of the deficit depends, not just on spending, but on revenues.)Friday night, the Tea Party nation finally let Boehner’s bill scoot through the House with 218 votes–just two more than it needed to pass. Boehner’s plan then went to the Senate where, within a couple of hours, some Republicans joined Democrats to defeat it handily, 59 to 41. At that point, the two chambers were no closer to compromise than they had been at the beginning of the week.

What was the point of a week-long exercise that humiliated the House Majority Leader, and made it clear to financial markets world-wide that Washington is in disarray?

Boehner believed that if House Republicans succeeded in passing legislation, they could then tell voters: “We passed a bill. Senate Democrats did nothing. We are the ‘Grown-Ups’ on the Hill.” He also could claim that he had fulfilled his role as House Speaker: he had gotten “something done.” The fact that his proposal would never become law and never affect the debt didn’t matter. In other words, this fight has nothing to do with the economy, and everything to do with embarrassing the president.

Conservatives reasoned that if the President’s party failed to pass a bill of its own, and the U.S. wasn’t able to pay all of its bills, the president’s opponents would be able to claim victory. The Washington Post’s Ezra Klein has made the argument: Republicans were willing to let the nation default. Democrats were not. This gave Republicans great leverage. Granted, default would constitute an economic catastrophe, but for conservatives it would be a political victory. As Senate Minority Leader Mitch McConnell has indicated in the past, "the single most important thing we want to achieve is for President Obama to be a one-term president.”

As it turns out, today no one was declaring victory. Except perhaps McConnell. This the first time that I can ever remember seeing the man smile.

Our Real Economic Crisis: Unemployment

The single most important thing that Washington could accomplish this year is to create jobs. Unlike the debt, unemployment is the immediate economic crisis threatening this country. As Bill Clinton pointed out last week “You can’t balance the budget on a busted economy. . . Republicans think they have Democrats and the president over a barrel. . . . We have to stand up to them.”

Nevertheless, the Washington Post’s Ezra Klein is among those who suggest that once conservatives decided to take this route, it is “difficult to see how [the story] could have ended otherwise.” President Obama was bound to lose.

I disagree. As Krugman observes: “The Obama administration could have resorted to legal maneuvering to sidestep the debt ceiling, using any of several options. In ordinary circumstances, this might have been an extreme step. But faced with the reality of what is happening, namely raw extortion on the part of a party that, after all, only controls one house of Congress, it would have been totally justifiable.

At the very least, Mr. Obama could have used the possibility of a legal end run to strengthen his bargaining position. Instead, however, he ruled all such options out from the beginning.” Once again, the President surrendered before the debate began. No doubt he hoped that by being reasonable, he could soften up the opposition. But these folks don’t soften.

“But wouldn’t taking a tough stance have worried markets?” Krugman asks, and answers his question: “Probably not. In fact, if I were an investor I would be reassured, not dismayed, by a demonstration that the president is willing and able to stand up to blackmail on the part of right-wing extremists. Instead, he has chosen to demonstrate the opposite.”

Again, Krugman is right. Throughout the week I was following Wall Street’s response. The Street was dismayed by the spectacle of reckless politicians taking the economy to the brink of default, and the fact no one was stopping them. Who was in charge? Most on Wall Street realized that, in the end we wouldn’t default because we couldn’t (as smart investors know, “what can’t happen won’t”), but the damage already had been done.

In the months ahead at least one credit rating agency will almost certainly down grade our debt. Does that matter? It will if interest rates begin to climb and more families find that they can’t pay their variable rate mortgage , or that the interest rate on their credit card debt is soaring. The unemployed will find it especially hard to make payments, especially if unemployment benefits are not extended before the end of 2011. Then there are the graduate students who will discover that, under the terms of the “compromise” they must begin paying interest on their loans while they are still in school. (CNN reports that “the savings taken from the pockets of students [to help pay down the debt] will total $21.6 billion over the next ten years.) . )

Krugman continues: “It is, of course, a political catastrophe for Democrats, who just a few weeks ago seemed to have Republicans on the run over their plan to dismantle Medicare; now Mr. Obama has thrown all that away. . . .

“In the long run, however, Democrats won’t be the only losers,” Krugman concludes. What Republicans have just gotten away with calls our whole system of government into question. After all, how can American democracy work if whichever party is most prepared to be ruthless, to threaten the nation’s economic security, gets to dictate policy?”

Again, none of this had to happen. Lifting the debt ceiling should never have precipitated the high drama of the past two weeks. But now, a contrived crisis has turned into a real one. This compromise deals a savage blow to an already sick economy. By “the economy” I don’t mean “Wall Street” I mean “Main Street,” where you and I live.

I agree that all of this makes no sense, but my take is a bit different.
Citizens simply have lost trust in the people leading political parties and government. If you start with that assumption, everything in the last 4 years makes perfect sense and the electorate is trying to clean house.
If you follow that logic then in 2012 we will get a republican president and senate and a democratic house.
The only real hope is a third party forms and has as its planks those positions which are supported by the majority.
And a third party is what we need since most folks support some traditionally democratic positions and some traditionally republican positions. Maybe we can trust new folks unless they are recycled.

As long as campaign cash is king, and corporations have the same rights as actual American citizens, a third party isn’t going to be a major force. We now have gov’t of the top 2%, by the top 2% and for the top 2%. Everyone else if SOL.

Steve H. and Joe Says:
Joe, I too am ready for a third party. But Steve H. is entirely right: a third party wouldn’t have the campaign contributions that it needs to run its candidates.
Elections in this country have become very, very expensive– in part because they drag on for so long, and TV advertising is enormously expensive.
In theory, we could shortent he elections and pass a law saying that no one could begin advertising until, say, two months before the event.
But at this point, the networks, cable stations, etc are extremely dependent on the money that comes in during our long campaign season. So t his will never happen.

SteveH Wrote:
As long as campaign cash is king, and corporations have the same rights as actual American citizens, a third party isn’t going to be a major force. We now have gov’t of the top 2%, by the top 2% and for the top 2%. Everyone else if SOL.
————-
This brings up the proverbial question for me of why so many voters would vote to keep these 2% upper level income supporters in power. You would think that most voters were worker types and not in the top 2% income brackets, yet they continually vote for the Repub party that exports and weakens their jobs and concentrates money in the hands of a few hoping that trickle down will somehow make miracles. Maybe it is not just campaign cash that is the fault for this seeming masochistic behavior on the part of many voters, but some kind of propaganda machine that overcomes the ability of a voter to see their own economic self interest?? I would be curious to know what exactly drives many Americans’ voting beliefs

NG–
A great many Americans admire celebrities. The super-rich count as celebrities (Trump, et. al.)
For reasons I don’t entirely understand, Americans identify with them. And a great many Americans actually believe that maybe someday they will win the lottery, or whatever, and become famous. Ot that their children will.
Thus they want to protect the class system in this country.
They also believe the myth that people who amass great wealth (CEO’s paid $7 million a year etc.) are
working hard than the rest of us, are in some way making great contributions to society and so “deserve” their great wealth.
Over the course of my career as a financial journalist I’ve interviewed a great many very powerful CEOs. Only
a handful are brilliant, creative, hard-working. Most are just people who are very ambitious and know how to cimb a corporate ladder.
Finally, if you look at voting patterns you will find that African-Americans are more likely to vote in their own economic interest than white Americans.
African-Americans know that our system is stacked against them– that their kids are not getting a good education in our public schools, that most politicians care primarily about the rich, etc.
Most white Americans dont’ want to believe that. They think that the U.S. is the best country in the world.

Great piece Maggie
Also 24/7 TV coverage of the health care debates and votes in Congress and now this- the contrived debt ceiling crisis- for all to see on TV again.
Surely this coverage will lower the respect for all politicians and a very broken political process
Dr. Rick Lippin
Southampton,Pa.

Dr. Rick–
Thank you.
And yes, I think the coverage of this debate, along with the coverage of the
endless bickering on HC reform has left many voters depressed and disgusted.
Washington just doesn’t seem to care about what we care about– unemployment, inflation in the price of food, gasoline, electricity etc., the fact that owning a home is becoming a receding dream, the fact that so many U.S. children now go to bed hungry.
When I say “Washington doesn’t seem to care about” I am including President Obama as the leader of our govt’ in Washington.
For a long time, I have felt that progressives should support and encourage the president. He inherited a horribly difficult situation.
Now, I feel that progressives should urge the Democratic party to find a new, sronger candidate.
The coutnry needs someone who possesses the politically savvy of LBJ, the charisma and common touch of Bill Clinton, and the fearlessness of FDR, who said of his conservative opponents “I
welcome their hatred.”
Today’s conservatives– the folks who would love to slash uneployment bnefits, Medicare, Medicaid, Social Security– are very tough
Or at least they think they are tough.
We need someone in the White House who knows how to cut them off at the knees.
Mitch McConnell, the Tea Party foks– these are not people to fear.
They are small-minded, frightened people.

I guess I think that one person, even if that is the president, really can’t change things. Too many entrenched folks elected, in the parties, in government, in lobbying. The trend now is to vote out folks which will create continuous turnover. Maybe that will loosen the hold of the entrenched folks, or maybe it will open the door for some strong leaders who have less folks to fight.
I also think things are changing in how effective money will be. Even now it is getting pricier with diminishing results since lots of folks who didn’t have backing, at least initially, won. Moreover, the money invested in a campaign needs to pay back benefits or it is not money well spent. The more disarray in turnover, the less a campaign contribution investment will return.
If you look at it from the investor’s point of view, the weakness in investing in campaigns is in the product performance and lack of a warranty.
So we find ways to make it even more expensive and less certain while we find ways to lower the returns.

“I think the coverage of this debate, along with the coverage of the
endless bickering on HC reform has left many voters depressed and disgusted.”
While the debate over the debt ceiling was not a pretty picture, what disgusts me even more am a broad middle class that wants and expects more from government that it’s willing to pay for. Just this past weekend, a Republican congressman from Idaho supported by the Tea Party told David Gregory on Meet the Press that he sees constituents in his office every day imploring him to cut spending but not my program. It’s the same with all the major interest groups from the military industrial complex to the AARP to agricultural interests. Raising taxes on the wealthy enjoys widespread support because it would only affect 2% of voters. While I personally would support broadening the tax base and lowering rates in a way that collects more net revenue from high income people even though it would cost my family more in taxes, the mentality among most people is to fix the debt and deficit problem at someone else’s expense but not mine. For the record, I also support raising the capital gains tax rate back to 28% where it was following the Tax Reform Act of 1986 from 15% today, which would also cost my family more in taxes.
What I think the Congress and the President need to do is to call in every interest group and ask: What’s your contribution? The DOD could only recommend cuts in defense spending. Agricultural interest cut only recommend cuts in farm subsidies. The AARP could only recommend cuts in Social Security and Medicare benefits. The wealthy could suggest how their taxes could be raised in ways that would do the least economic harm. You get the picture. The idea is to either get some solid input from these groups or expose them as selfish hypocrites.

Yes Barry-
“Big Government is bad until it cuts programs that affect one’s programs personally”.
The hypocrisy and selfishness is painfully evident.I agree that we should force more very specific transparancy.
Thanks
Dr. Rick Lippin
Southampton,Pa

Good piece and some great comments:
It’s hard to argue with PIMCO’s Mohamed El-Erian’s criticism of reducing public spending immediately.
I think even the Fed doesn’t believe that the only remedy to them, QE3, would have much effect without government spending.
I love Barry’s idea re stakeholders being asked to pick their own poison. Similar to a previous suggestion in this blog that medical specialists be asked to do the same re reducing expenses in only their own fields. Good idea, but getting it passed?
I was actually almost hoping the Congress would deadlock and despite the administration’s protestations that he had already ruled it out, the President would unilaterally declare that he would follow the dictates of the 14th amendment, putting an end to the debt limit issue for all time. My guess is that his decision was political rather than constitutional.

Barry,
Barry, while your suggestion sounds very fair, it assumes that we are all starting on a level playing field.
You write: “The AARP could only recommend cuts in Social Security and Medicare benefits. The wealthy could suggest how their taxes could be raised in ways that would do the least economic harm.”
Mosts of the seniors that AARP represents cannot afford cuts in Social Security or
effective Medicare benefits. (And seniors are not in a good position to recommend what ineffective benefits should be cut– they are not doctors.) Most Seniors cannot afford higher co-pays.
And as I explained in an earlier posst, shifting eligibiilty to 67 would not save money and would hurt the poorest seniors.
Should we “means-test” Medicare and Social Security? Only if we want to undermine public support for both programs.
These programs are so popular in large part because they cover everyone. When the wealthy don’t get the same benefits they become less interested in supporting a program. (This is why the wealthy are not terribly interested in paying higher property taxes to support smaller class sizes in public schools. They don’t send their childen to those schools.)
If we means-tested Medicare, it could soon become a “poor program for the poor and middle-class”–not unlike Medicaid.
As I have pointed out in the past, median income among seniors is $20,000.
Many have much less. And they have little wealth.
In other words most seniors just don’t have much to “give up.” And both Medicare and SS need the support of those wealthy seniors who do have something to give up.
We might better ask those wealthy seniors to make a contribution in another way– taxes on wealth (perhaps a VAT on luxury items, or higher inheritance taxes at the top.)
The wealthy, on the other hand, do have more than they need. Tax rates at the top are at historic lows. And the notion that raising their taxes might hurt the economy is part of Reaganomics–disproved long ago. When George Bush Sr. lifted taxes, the economy was not hurt. (Though conservatives howled.)
America’s wealthy have become super-rich, while American’s middle-class become less and less middle-class. They’re slipping down the greasy poll.
Bottom line: some people have something to give up; some don’t.
Poor children have nothing to give up.
Rather than asking everyone to make an equal contribution, we need to redistribute wealth and income from those who have more than they need to those who have far less than they need.
Finally, the physician who asked every specialty to point to areas of waste in that specialty was not asking them to think about what would be good for patients– fewer back surgeries for instance– rather than what they could give up. In other words, he was focusing on the quality of care.
Everytime we try to improve the quality of
care we also save money. But that’s a byproduct of reform– not the main agenda, at leaset from the point of view of this physician.

Richard K.
Thank you.
I think the president should have let the conservatives take us to the brink — and over the brink.
As Volcker pointed out, we would continue paying interest on our debt. We have no choice. But we would have stopped sending out SS checks, and pay to the military.
That would have lasted about 36 hours. The public protest would have been enormous. I realize the delay would have caused some hardship, but I’m sure landlords would have understood and waited 2 days for late rent. Banks and credit card companies could be told that they couldnt’ charge interest for late payments, etc.
And Republcians would have taken the blame.
Yesterday I was talking to a former membe of the Obama administration who pointed out that during the debt debate, Obama was trying to negotiate with
crazy people. “You can’t negotiate with crazy people he said. All you can do is give them some rope “and wait for them to self-destruct.”

Richard K.–
I agree that Obama was making a political decision, not an economic decision.
O. genuinely believes that it’s important to reduce the deficit at this time.
I guess he believes this because the polls tell them that this is what the American public believes.
In fact, it’s important to reduce the deficit but NOT NOW. This economy needs stimulus. By cutting govt spending you are going in the oppositie direction.
With less government spending, you have fewer jobs, which, in turn, reduces consumption.
Unless consumption picks up the private sector won’t create jobs.
So cutting spending in an effort to reduce the deficit is a terrible idea.
The thing to do at this point is to spend money in constructive ways that will create jobs. This in turn will lead to higher tax revenues, and those revenues will help reduce the deficit.
(You also need to raise taxes near the top of the income ladder.)

Maggie –
I don’t expect ordinary seniors to recommend cuts in Social Security and Medicare benefits. I expect the AARP to do it on their behalf. The AARP has plenty of expertise in these areas. I’m interested in addressing the LONG TERM solvency issues, and I think more than just raising taxes or squeezing payments to medical providers should be part of the solution. Here are some ideas in no particular order.
1. Determine the initial social security benefit based on the beneficiary’s 38 highest earning years instead of the 35 highest that are used currently.
2. Use a more conservative indexing formula to determine annual increases in social security benefits.
3. Tax 85% of benefits regardless of income. The lowest income seniors still would not owe more income taxes in all likelihood but more middle class seniors would.
4. For Medicare, allow CMS to specifically take cost into account in determining what it will and won’t pay for.
5. Move the ultra expensive dual-eligibles into managed care and use more intensive case management to better coordinate their care and reduce costs.
Separately, I oppose means testing of either program for the reasons you mentioned though we are already doing it to some extent for Medicare Parts B and D.

Peter–
What we pay in is a percentage of our income.
If we followed your suggestion,low-income Americans(who also are the sickest)would receive less
medical care. And they dont’ have savings to fall
back on. They never earned enough to be able to accumulate a nest egg.